Shailaja Sharma, Daily News & Analysis

MUMBAI, 29 September 2011

High prices and economic uncertainty appear to be turning consumers stingy, if not altogether unwilling to spend.

Going by sector analysts and retail companies, spending on discretionary items is definitely shrinking and even items of daily consumption aren’t quite flying off the shelves as they used to. In fact, consumers are increasingly hunting for more value for the price they pay at retail stores.

All this gives reason to believe consumer spending is set to decline in the second half of this calendar year.

“Commodity-led categories like soaps, detergents and tea will see downtrading to cheaper brands. In some other categories, the frequency of purchase will come down or consumers will move towards smaller packs,” said Gautam Duggad, an analyst at Prabhudas Lilladher.

Saugata Gupta, chief executive officer, consumer products, Marico Ltd concurred. “Lack of feel-good factor will result in a cut in discretionary spending. In the past couple of months, inflation pressure has led to a certain softening of discretionary spending.”

Automotive and consumer durable sales have already taken a beating this year, while many organised retail formats are not performing well.

“The moderation in footfalls at retail stores is not as pronounced as during the slowdown of 2008-09, but the kind of upswing in sales that retailers had expected will not be met with as consumers are very careful about how they spend their money,” said Devangshu Dutta, CEO of retail consulting firm Third Eyesight.

Going by sector analysts, though most FMCG categories are still showing healthy volumes, a possible slowdown in consumption cannot be ruled out.

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An official at a leading hypermarket chain, who did not wish to be named, said the sale of discretionary and expensive items across foods and personal care has remained sluggish over the last few months.

At the same time, he said, the level of deals and discounting by consumer companies in modern trade outlets is increasing so consumers prefer to buy items in bulk.

“While the middle-class, urban consumers are willing to buy more premium products, they are also restricting their purchases of late and this worried sentiment is capable of affecting consumption. But the trend of discounting and deals is going to continue to grow as modern trade grows.”

Though the trend is not as prominent in food and grocery at hypermarkets, it might just be the beginning, said the official.

Marico’s Gupta feels it will be six months before consumer spending will improve. “Consumer companies have been careful in taking price increases, and there will be less willingness to pass on prices further,” he said.

Consumer goods giant Hindustan Unilever Ltd recently cut prices of its detergent Surf Excel Blue on certain large stock-keeping units by 21%, indicating competitive action to gain market share and to increase off-take at retail shelves. Detergents is a highly penetrated category and analysts said this kind of pricing action is not accruing from lower raw material costs, but purely to avert consumers from downtrading to cheaper brands. Similarly, in categories that have low-penetration in consumer households that are primarily sold in modern trade stores like processed foods, for example, some companies are offering a ‘buy one get one free’ on their products.

Interestingly, the flourishing discount-led e-commerce business in the country has seen a growth of over 100% in the last one year, where most of these online retailers are themselves a year or two old in the business. This means that a huge number of purchases have been converted from offline to online medium.

In such a scenario, consumers are most likely to compare prices across general trade and modern retail outlets to evaluate where they get more (value) for less (money). They are also likely to compare prices on online retailing portals before making a purchase in discretionary categories, said analysts.

At a recent industry event last week, retailers and marketers were seen expressing concern over Indian consumers’ aspirations and expectations changing dramatically. According to them, while Indian consumers were willing to trade-up to expensive and luxurious products, they remain too value-conscious.

“The Indian consumers want value in anything they buy or experience, and they are not ashamed in repeatedly attempting to get discounts,” Rajiv Mehta, managing director, Puma Sports India said at the event.

Rama Bijapurkar, a leading market strategist and expert in consumer behaviour, couldn’t agree more. “Over the years, the Indian consumer has actually seen quality improving and prices coming down, of everything from air-conditioners to air-travel. As a result of that, you have an entire generation of monster-consumers who are shaped by what time and place they grew up in.”

The ABCD of Indian consumers has changed, said Rahul Singh, founder and managing director of indoor golf lounge Golfworx. Today, it’s “astrology, Bollywood, cricket and discount,” he said.

“The same consumer I’m trying to trade up will try to trade me down (by seeking discounts).”

When the global consumer confidence hit a six-quarter low in the second quarter of this calendar, a Nielsen online consumer confidence survey found that Indian consumers had suddenly turned jittery about spending on items of daily consumption and big-ticket purchases alike. Indian consumer confidence, as per the survey, slipped 5 points at 126 on the index despite Indians being most optimistic in their confidence about job prospects and financial stability.

The trend is seen persisting as long as inflation, fuel price hikes and an uncertain global economy remain a cause for concern.

The Nielsen consumer confidence estimates for the current quarter, to be released in October, will ascertain if the consumer sentiment has improved or slipped further. Results of consumer companies for this quarter, particularly in the FMCG space, will also be watched.